Silicon Valley Bank: What Happened and What We Can Learn
On Friday, March 10, 2023, it was announced that Silicon Valley Bank, a large bank in the Silicon Valley area, was in a collapse. But what happened? And what can customers expect in the future?
Silicon Valley Bank collapsed because of the market downturn and poor investment decisions, which included bonds. Because of rising federal interest rates, the bonds became unprofitable. When SVB announced this, customers panicked and began to withdraw their funds, causing a collapse.
Let’s look at some of the details of the SVB collapse and what customers can expect going forward.
Why Did Silicon Valley Bank Collapse?
Hearing about collapses in the cryptocurrency world is common, as projects and banks regularly become insolvent. But many who don’t invest in cryptocurrency were shocked at the news that a regular bank like Silicon Valley Bank also become insolvent. So why did this happen?
Well, banks aren’t there to hold money just to be a good friend. No, banks are a business. They make money by holding money and lending it out to others. As a thank you for doing so, they then share the profit they receive from lending your money out. This is called interest, and it is typically credited to your account at a specified rate.
Silicon Valley Bank was operating as a normal bank would, but they were known for specifically lending money (and holding the money) to tech companies and startups, which are popular in Silicon Valley, California.
Unfortunately, the last few years have been rough on cryptocurrency and tech companies. As a result, many of the companies that store their money in SVB have had to make withdrawals. Not only that, but SVB took the money given to them by these customers and used them to purchase government bonds.
While bonds are typically a low-risk investment, their interest rate changes based on the federal interest rate on an inverse scale. This means as the federal interest rate increases, the amount these bonds are worth decreases. Therefore, thanks to the recent rate hike, SVB found itself with unprofitable bonds which it had purchased when interest rates were low.
Tech companies have continued to request withdrawals from the bank, and on March 8th, 2023, SVB found it could not honor all withdrawal requests. As a result, they announced to their investors that they would need to slow withdrawals until they could sell off more of their bonds (at a loss).
Of course, this caused investors to panic and increased the number of withdrawal requests. This further pushed the bank into insolvency until they halted withdrawals entirely. On March 10th, 2023, the US government stepped in as the company entered its collapse.
Related: The Collapse of Three Arrows Capital Hedge Fund
What Does This Mean for Silicon Valley Bank Customers?
Unlike many cryptocurrency projects, Silicon Valley Bank is FDIC insured. This means they pay money into a fund to cover withdrawal requests in the event that a collapse happens. Therefore, most customers of Silicon Valley Bank will receive some or all of their deposits back. It’s important to note that not all account types are FDIC insured.
Is Silicon Valley Bank Getting a Government Bailout?
While the government did step in and say they would pay back all those who deposited money in Silicon Valley Bank using FDIC insurance, this is not a bailout. The government is not saving the bank. It will remain closed, and anyone who invested in Silicon Valley Bank will likely lose most or all of their investment.
Anyone who did buy SVB stock should be patient, as in the coming days, the bank will sell off any remaining assets to settle with investors. It is unlikely, however, that you will receive anything close to what you paid for the stock.
It is also important to specify that this money being repaid to customers is money from a specific program that all banks pay into. This money is not coming from taxpayers and will not affect the government budget.
Related: The Fall of FTX
What Does This Mean for The Rest of the Banks?
For the rest of the US banks, it is likely business as normal, however many economists are warning that this collapse is a sign of underlying problems within the US financial system, and we think this is absolutely true.
Many people like to talk down about cryptocurrency investments because of their risk, but the truth is, there is no guarantee any business will survive whether they operate in cryptocurrency or are an FDIC-insured bank. While deposits, all in all, are safer in a regular bank than in cryptocurrency, all those who invested in SVB stock will likely end up at a loss rather than a profit.
Additionally, just as different cryptocurrency coins are tied together, so too are different banks. Now, many institutions around the world are checking their portfolios to see what kind of exposure they had to this banking crisis. Others are estimating that other banks may also collapse due to exposure to bonds (which are declining in value) or tech stocks.
The point is, investing in cryptocurrency is risky, but the financial system as a whole is risky. When you put money in a bank, you are trusting them not to lose it, just as you are trusting a cryptocurrency to raise in price rather than fall. Bonds, while often considered the safest investment, are not foolproof and will not always be worth the investment.
This means no matter what you choose to invest in, you need to trust the company you are giving your money to, whether it is a bank, brick-and-mortar company, or a cryptocurrency company. Even if you want to go for low-risk bonds, remember that these are an investment in the US government, and before you buy them, you want to make sure you trust the US government to provide you a return within the time period specified on the bond.
Overall, perform due diligence before you put your money into anything. While a bank like SVB is slightly safer than other investments due to FDIC insurance, it still carries some risk, especially when you invest in the company’s stock, as these deposits are usually not FDIC insured.
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